One of the key challenges for entrepreneurs and startup founders is the TAM — Total Addressable Market.
I’ve seen many -too many!- pitches starting with a crazy TAM: “billions of people would need our fantastic product, so if we only get 1% of that, we’ll all be super duper rich — woohoo!”
Well, not “woohoo”, rather “duh, really”? I’m not saying that there aren’t billion dollar markets (and valuations)-just look at Uber and other unicorns, just that there aren’t many and most investors will be skeptical when hearing huge numbers. You want to be taken seriously.
To be honest, market segmentation is not always straightforward, especially for technical -rather than commercial- founders, and the pressure to make investors dream with big numbers is strong… but wrong: the logic to reach the numbers in the TAM is what will convince there really is a market demand. Your TAM should be a focused segment, not the whole world.
So let’s review the fundamentals of market segmentation for those founders who aren’t familiar with the process.
Starting with the end in mind, it is important to highlight that the objective is to find a narrow market, but one that you can dominate. That’s your beachhead, and your real TAM. From there, if all goes well, you can expand into adjacent markets, new countries, etc. Don’t worry, investors are very good at doing that type of maths in their heads, and see the potential of where it could go: being scaleable is what is appealing, especially being scaleable easily and cheaply enough, such as software companies.
It is not always a straightforward process as there can be more than one segment to reach for the business to work, for instance in platforms and multi-sided markets such as eBay (which brings together sellers and buyers). In that case, you need to follow the process below for as many sides as needed.
For a consumer segment, you can save time and money by doing a few online tests: write a few ads for facebook and analyse the data to see the profile of the people who showed interest (by clicking through). You want to gather as much information as possible, especially about their profile, needs, and decision journey. For consumers, the most important type of segmentation is needs-based. Some products are specific for certain demographics (nappies — you need to find mums with newborns) but the “need” is what create the opportunity (I need to protect my baby from rashes and his bedding from number 2s). Also consider how they feel: adventurous Huggies mums or safe Pampers mums?
Try and get a feel about why they’d buy (your CVP — customer value proposition), and how?
For B2B, especially the bigger end of town (entreprise, and government) rather than SMBs, your target market should be easier to define as you might even be able to find a list of companies in a target vertical industry. But choosing the main vertical in the first instance is the real challenge. Consider the following criteria:
- what do they value
- can they afford it
- can you reach them easily
- what’s the alternative they are currently using (including doing nothing!)
- are there barriers stopping them from buying such solutions, or from you (many big corporates avoid startups because they are worried we won’t be there in 12 months!)
- if your solution is not new (just better, or cheaper), is the segment growing
These criteria should help you select 1 or 2 target verticals to focus on — and focus is the keyword: startup resources are very scarce. If you try and reach everybody and anybody, you very likely will join the 90%+ of startups who fail.
And focus is important because there is a lot to do at this stage: like a consumer profile, you want to build personas for the different B2B stakeholders as there usually is a group of people to convince, from the buyer, to the CFO (who wants a business case) to the CTO (who doesn’t want to disrupt the current IT architecture) to procurement, finance, etc etc etc.
B2B selling is long, slow and frustrating, so make sure you understand them well so you increase your “sales velocity” and shorten the sales cycle. A persona will be more than a job title; it will include their business needs, concerns, interests, as well as how they research solution like yours (online? in magazine? at trade shows? through word of mouth and recommendation?) and how they buy.
For B2B, digital is less useful, apart from SMBs using LinkedIn for testing: you really need to talk talk talk (or rather listen, listen, listen!). If you have customers (whether paying or not) trying your product out, you also need to observe how they use it, what their frustrations are, and how they interact with it.
In both cases, B2C and B2B, you want to pinpoint your high-value customers: think of the 80/20 Pareto rule: 20% of your customers are likely to represent 80% of your sales / profits: what makes them different?
The good thing about that research is it will help beyond the market segmentation: you can use the data collected for your IM, to help raise funds from investors.
Also, having a clear target segment will mean you will have a clear go-to-market.
Whilst doing your segmentation and clustering the various groups, make sure they are big enough to be financially attractive but small enough to have specific needs and enable you to differentiate. Don’t go after the Chinese or Indian market just because it’s big! Use a small, segment as a proof of concept, and as a springboard to adjacent markets, ie other markets who could use your product or service -as such or adapted- for a new usage or need. In other words, identify your lead customers who can then refer your product to others.
Hard work sure, but nobody ever said entrepreneuring is easy!